U.S. Treasury Weighs Plan to Help 1 Million Keep Their Homes

By Rich Miller -
Jul 20, 2011

The U.S. Treasury Department is
exploring a plan that could help 1 million or more homeowners
avoid foreclosure, according to housing market executives.

The proposal is aimed at promoting modifications of
delinquent or defaulted home loans, including writedowns of
principal, by bringing fresh private capital into the market. It
would apply to mortgages that are bundled into mortgage-backed
securities not issued by government agencies.

One of the impediments to breaking the nation’s cycle of
foreclosures and falling home values is that writedowns can’t
happen under the convenants governing such securities. The
proposal being looked at by the Treasury is aimed at unlocking
the so-called private-label notes that account for about 20
percent of the $6.8 trillion in mortgage-backed securities
outstanding.

“This is not a silver bullet, but it is one of the tools
that should be used,” said James Lockhart, the former regulator
of mortgage companies Fannie Mae and Freddie Mac. “We think
this would be a way to stop some of the foreclosures, help
stabilize neighborhoods and help save some families.”

Helping homeowners avoid foreclosure would bolster the
housing market, which Federal Reserve Chairman Ben S. Bernanke
called “one of the major sources of the slow recovery” in
testimony to Congress last week.

Sales of previously owned U.S. homes unexpectedly declined
in June to a seven-month low as the industry struggled to
overcome rising unemployment and foreclosures, according to data
released today by the National Association of Realtors.

Loan Servicers

The plan being looked at by Treasury is based on a paper
whose main author is Jordan Dorchuck, executive vice president
of American Home Mortgage Servicing Inc. in Coppell, Texas.
Dorchuck said he’s contacted other loan servicers at the behest
of the Treasury Department to gauge their interest in the
proposal and generally they think it could have some value.

“Treasury is interested, but they don’t want to endorse a
program unless they think it will be successful,” Dorchuck
said. Treasury Department spokeswoman Andrea Risotto declined to
comment.

The proposal coincides with Obama administration efforts to
step up aid to homeowners and revive the housing market. The
administration’s Making Home Affordable foreclosure-prevention
program has fallen short of expectations, according to data from
the Treasury. When President Barack Obama announced the program
in 2009, he set a goal of 3 million to 4 million modifications
by the end of 2012. Of the 1.6 million trial plans started since
then, 608,615 have turned into permanent modifications, the data
show.

‘Some Progress’

“We’ve made some progress,” Obama said at a town hall
meeting at the White House on July 6 sponsored by Twitter, Inc.
“But it’s not enough. And so we’re going back to the drawing
board, talking to banks, try to put some pressure on them to
work with people who have mortgages to see if we can make
further adjustments, modify loans more quickly, and also see if
there may be circumstances where reducing principal is
appropriate.”

Nearly 11 million U.S. homeowners were “underwater” on
their mortgages in the first quarter of 2011, meaning their
properties were worth less than the amount they owed, according
to CoreLogic, a data company in Santa Ana, California.

Laurie Goodman, an analyst at Amherst Securities Group LP
in New York, said the proposal has merit and estimated that 1
million homeowners could benefit. “The idea of having the
facility to sell loans out of trust is very valuable,” said
Goodman. “There just have to be protections in place to make
sure the investors get the best price for these loans.”

If that happens, the value of the securities would likely
increase, she added. In their paper, Dorchuck, Lockhart and
housing consultant Pete Mills argued that market prices of the
securities already reflect anticipated losses from foreclosures
that would be avoided via the loan sales.

Private Label

Of the residential mortgage-backed securities outstanding,
about $1.3 trillion are so-called private label notes that were
issued by banks and other financial institutions, according to
data from the Securities Industry and Financial Markets
Association. “That’s where a lot of the trouble is sitting,”
Lockhart said.

Many contracts governing such securities cap the percentage
of loans that can be modified or prohibit reductions of
principal, according to the paper by Dorchuck, Lockhart and
Mills, managing director of Mortgage Banking Initiatives Inc. in
Alexandria, Va.

To get around that, they want the Treasury to help clear
the way for sales of delinquent or defaulted loans out of the
securities at a discount to outside investors.

Because they would buy the loans at less than face value,
these investors would be more willing to renegotiate the terms,
including writing down principal, the plan’s backers say.

Legal Cover

No government money would be needed, Dorchuck said. The
Treasury would have to provide the banks servicing the loans
with legal cover against lawsuits by designating short-sales as
“qualified loss-mitigation activity” under legislation passed
in 2009.

Lockhart said Treasury officials have talked about the plan
with its backers, though he himself hasn’t discussed it with the
department. He declined to elaborate.

Dorchuck’s American Home Mortgage Servicing Inc., which
calls itself the 15th largest such company in the U.S., is owned
by WL Ross & Co. LLC in New York. Lockhart, one of the paper’s
authors, is now vice chairman of WL Ross.

Dorchuck said both companies might benefit if the plan went
through, because Ross is a buyer of mortgages and AHSI could get
more servicing business.

Goodman and Lockhart said that there are enough potential
buyers of the loans in the market to make the plan work.

‘Good Demand’

“There’s reasonably good demand among private equity
investors for pools of mortgages,” Lockhart said. “We
certainly have bought some for our mortgage fund, and we’ve seen
a lot of competition out there.”

Such demand would allow the banks to get more money from the
sale of the loans than from taking the borrowers through to
foreclosure, he said.

The plan wouldn’t cover mortgage-backed securities issued
by government sponsored agencies, primarily Fannie Mae and
Freddie Mac. The Federal Housing Finance Agency, which regulates
Fannie and Freddie, bans writedowns of principal of the loans
the two companies hold because that would lower the value of
their assets at a time when they continue to rely on taxpayer
aid to operate, FHFA Acting Director Edward J. DeMarco said in a
March letter to lawmakers.